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The Reserve Bank of India seems to have shifted the focus of its foreign exchange interventions back to the spot dollar/rupee market after having intervened heavily through forward contracts in the currency since May.

Data show RBI sold $921 million in the spot market in November most in a year. In contrast, RBI didnt intervene in the forwards and in fact had unwound some of its positions there.

The outstanding position of RBI in forwards slipped to $13.54 billion in November from $14.08 billion in October.

RBI chooses to intervene in the forex market through forward contracts to postpone the impounding of rupee liquidity due to its dollar sales. It depends on how they project liquidity to be, as when delivery is taken for the forwards contract, it will tighten liquidity then, said Abheek Barua, the chief economist at HDFC Bank.

Intervening in the spot market is a better way especially when you have room in terms of liquidity, he added.

An intervention in the spot market not only affects the currency immediately, but also affects banks liquidity as RBI impounds rupee when it sells dollars. Heavy intervention during November 2011-January 2012 had led to worsening of the liquidity deficit and banks started borrowing over R1.5 lakh crore from RBIs repo tender. This prompted RBI to intervene in the forwards market more therafter.

Now a year later the liquidity situation seemed to have given more elbow room to the RBI for intervening in the spot market again.

In the beginning of November 2012, banks' borrowings from the RBI's repo tender was around rs 60,000 crores which eventually rose to rs 1 lakh crore due to the $921 million dollar sales by the central bank.

The rupee's volatility which increased manifold had prompted heavy intervention by the Reserve Bank of India in the spot and then subsequently in the forwards market. In 2012, barring the July-September quarter, the currency has swung over 5 rupees on a daily basis and also hit a record low of 57.32/$ in June. The rupee, which lost over 5.5% since November 2011 to hit the record low level in June, has recovered 4.5% since then. The currency was trading around 54.80/$ on Wednesday.

Dealers said that the central bank's intervention in December and so far in January has been minimal as the rupee has largely been stable.